Wednesday, March 25, 2009

Time to move on from the bank solvency issue, or at least move it to the back burner and hope it doesn't catch fire.

I think it's time I revisit the Flow of Funds report to see how much borrowing has changed. Another month of bad auto sales reports are due in a few days, and graphs will follow. The fall in auto sales has finally lead to huge production cutbacks in Japan. I will try to find domestic production numbers this month to see how the transplants are doing.

Thursday, March 19, 2009

It looks like I was a bit too optimistic about Geithner back when he was nominated, though I was hardly thrilled at the time. The Larry and Timmy team isn't doing any better than Hanky and Bennie - and Bennie is still in the mix, buying everything that vaguely resembles a security. The Big Sh*tpile™ is still just that, and it seems to be growing, somewhat like fractals do, into Eastern Europe. Other bad economic news abounds - far too much to catalog.

Anyhoo, my recommendation is still the same: nationalize pre-privatize (though I might reconsider now that Greenspan has come out in favor of it). There just is not any possible way to resolve a) buying assets at prices that keeps banks solvent and b) buying assets at prices that don't represent a huge giveaway of taxpayer money. All of the proposals so far are just the original TARP dressed up different ways.

So, I don't know if it is time for Geithner to go because I don't know if the ongoing paralysis/stupidity (take your pick) rests with him, or goes all the way to the top, or stops in the vicinity of that a**hole Emmanuel. (External pressure is a possibility, but I think that some details about the source would have leaked out by now.) But Obama needs to change course shortly, or he risks foundering his whole presidency on resolving the current crisis. That would put an end to very needed reform of the way the economy operates.

Friday, March 6, 2009

I am writing today about some important changes to the country's labor laws I think should made. Compared to other industrialized countries, American workers receive much less paid time off, and much less protection from excessive working hours. I would like to see the situation improved. Here are the issues:

Vacation accrual – America is the only industrialized country where workers are not guaranteed paid vacation time. The next lowest is Canada, which requires 10 days per year, and the highest are Finland and France, where 30 days are required. American employers should be required to give a minimum of 4 minutes of vacation per hour worked, phased in at a minute every 3 years. When fully implemented the rule would provide 15 days off for 1800 hours worked. Employers should not be able to force employees to use the vacation for holidays or furloughs, nor force employees to “use it or lose it.”

Require overtime pay on federal holidays – National holidays don't really exist for many workers in America, especially those employed in the retail sector. This disparity from the typical office worker is quite unfair. Requiring overtime on those days would close the gap.

Extend overtime protection – There are many non-supervisory employees who are overworked, especially in the software industry, because the minimum exempt pay level is far too low. It should be fixed at 6 times the minimum wage (currently equivalent to about $78,000 per year at 1800 hours of work)

Set higher overtime rates at extreme hours – All workers regardless of their exempt status should receive double overtime after 56 hours of work and triple overtime after 64 hours of work. The time should be calculated using a rolling 7 day window without regard to pay periods, so that employees are compensated for any block of extreme work. An exception should be made for workers addressing declared state or federal emergencies, where normal overtime rules would apply.

Crack down on contractor status abuse – Many companies have been successfully sued for classifying workers as independent contractors in order to evade various taxes and other obligations, but the practice continues. Federal regulation to curb this abuse was proposed in the last Congress, but did not go far. It should be revived and passed.

Obviously the current economic conditions will cause employers to oppose these changes even more vociferously than would be the case during an expansion. Nonetheless, I hope you make an effort to protect American workers from abuse and to give every worker time to rest and recuperate. They all deserve it, not just the people in charge.

I am writing today to express my frustration about the ongoing disaster that is the U.S. banking system. As I said in my previous letter of Sept. 23, “The rush to get [the bailout bill] passed is a scare tactic aimed at bullying Congress into passing something that favors Wall Street.” It was passed nonetheless and, unsurprisingly, did little to “calm” the markets. The reason is that the bailout bill did not address the fundamental problem: many of the country's banks are insolvent. Sec. Paulson's changing approaches to implementing the bill – first asset purchases, then cash infusions based on legislative intent, then back to asset purchases, and finally to complete disinterest – were counterproductive as well.

Unfortunately, the Obama administration to-date has not unveiled a better plan to rehabilitate the banking industry. The recent rumors about offering loan guarantees to private sector entities that buy the “toxic assets,” coupled with previous rumors about a “bad bank,” indicate that ultimately another TARP-like giveaway will be offered. The Obama administration continues to show signs of regulatory capture – meaning its thinking is guided primarily by the interests and assumptions of the industry, not the country at large. This is not surprising given that the core people appointed to handle the issue – Geithner, Summers, and Shapiro – all helped create the problem to varying degrees.

So it is now up to Congress to push the appropriate solution. In my previous letter I indicated that a bank rescue plan based on the “Swedish model” was the best approach, and that remains true. The fundamental steps are to 1) guarantee all liabilities (deposits, bonds) of all banks, 2) require the banks to re-value their assets (loans, other investments) either to market or to a very, very small-c conservative model, and 3) “nationalize” the insolvent banks with the goal of either consolidating them into solvent banks, or doing an public offering on the whole entity at some point in the near future. Essentially, it would be the FDIC process writ large, but with preemptive action. The goal is to make sure the banking system is not full of “zombies” – banks that are allowed to live on with poor capitalization and thus limited ability to lend. Japan experienced the effects of a paralyzed banking system during the 1990s, and that period is now referred to as the “Lost Decade.”

A key feature of a good plan is to make the irresponsible parties in the banks – senior management and shareholders, take the losses that should accrue to them. The TARP and other actions taken so far have been giveaways and are completely unacceptable. Shareholders failed to supervise the banks and should be wiped out. Additionally, I do not care about limiting the pay of current bank executives; I want them fired.

The country needs you to take action on the banking issue soon. Thank you for your time.

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